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SAC Puts Ten Days Of Insider Trading Behind It

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So Mathew Martoma: pretty bad investment for SAC, no? He "was unable to generate ... winning trades or outsized returns in 2009 and 2010, and did not receive a bonus in either of those years. In a 2010 email suggesting that Martoma's employment be terminated, an [SAC] officer stated that Martoma had been a 'one trick pony with Elan.'" Now we know what the trick was - it was insider trading! - and it looked like a good one in 2008 anyway, making SAC some money on the way up, saving it $276 million by selling out just before Elan announced negative drug trial results, and earning Martoma $9.3 million in what turned out to be his last bonus at SAC.

The trick looks less good today:

The Securities and Exchange Commission today announced that Stamford, Conn.-based hedge fund advisory firm CR Intrinsic Investors has agreed to pay more than $600 million to settle SEC charges that it participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies.

The SEC charged CR Intrinsic with insider trading in November 2012, alleging that one of the firm’s portfolio managers Mathew Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who was selected by the pharmaceutical companies — Elan Corporation and Wyeth — to present the final drug trial results to the public.

The settlement filed today in federal court in Manhattan is the largest ever in an insider trading case, requiring CR Intrinsic — an affiliate of S.A.C. Capital Advisors — to pay $274,972,541 in disgorgement, $51,802,381.22 in prejudgment interest, and a $274,972,541 penalty.

Just for fun the SEC also settled with Sigma Capital, another SAC affiliate, for $14 million over insider trading in Dell and Nvidia. Not the largest ever!

SAC's profits on Dell and Nvidia were six million and change, so the going rate for SAC insider trading settlements seems to be 2x the profits made or losses avoided, at least as the SEC counts.1 It's actually a little worse than that for SAC: the settlement technically comes out of the funds (which made the illegal profits), but SAC has promised to reimburse investors for any losses, though given that SAC charges 3 and 50 and is less than 40% outside money, SAC should only end up paying back 2.5x what it made.2

The SEC, in an abundance of caution after previous settlement unpleasantness, notes:

The settlement is subject to the approval of Judge Victor Marrero of the U.S. District Court for the Southern District of New York. The settlement would resolve the SEC’s charges against CR Intrinsic and the relief defendants relating to the trades in the securities of Elan and Wyeth between July 21 and July 30, 2008. The settling parties neither admit nor deny the charges. The settlement does not resolve the charges against Martoma, whose case continues in litigation.

I suppose the not-admitting-or-denying stuff will rile people up, but still I think this settlement sails through. For one thing: what is the SEC giving up? SAC is paying back 2-2.5x what it made on these trades, and the SEC in exchange ... is agreeing not to sue SAC, institutionally, any more about nine days' worth of Elan and Wyeth trades. (Why would it?) And it's cutting SAC a bit of a break on the penalty: the law allows penalties of up to 3x the amount gained by insider trading, in addition to restitution, meaning that SAC is getting essentially a 50% break on the total check it might have to write by settling now. Call it a volume discount for being the largest ever.

But the SEC doesn't give up much else. It's continuing its individual case - and the Justice Department is continuing its criminal case - against the individual insider traders (in particular, Martoma), and there's nothing in the press release anyway about the SEC agreeing not to (1) continue investigating other individuals at SAC3 or (2) continue looking into other SAC trades.

In fact, the statement that the settlement resolves claims "relating to the trades in the securities of Elan and Wyeth between July 21 and July 30, 2008" leaves open the possibility of further litigation over Elan and Wyeth: according to the SEC's complaint, Martoma and CR Intrinsic were buying Elan stock throughout 2007 and 2008 based on illegal inside information from Dr. Gilman. The settlement only covers those last ten days.

SAC says:

We are happy to put the Elan and Dell matters with the S.E.C. behind us. This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence. We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.

That's all pretty suspect isn't it? The fabric thing first and foremost: when you settle insider trading cases involving four stocks in two units of your firm in the same day, it's tough to talk about "continuing to maintain a first-rate compliance effort woven into the fabric of the firm." Baby steps: why not start maintaining a second-rate compliance effort appliquéd onto the fabric of the firm?

But also the "put it behind us" and "resolving all outstanding regulatory matters" and "move forward with confidence" bits. SAC got a break on the price here, arguably, paying $614mm instead of the theoretically possible $1.2 billion. But as the SEC's press release concludes, its investigation is continuing. And if there's one thing we know about the SEC, it's this: they really like investigating SAC Capital for insider trading. I doubt $614 million is enough to make them give that up.

CR Intrinsic Agrees to Pay More than $600 Million in Largest-Ever Settlement for Insider Trading Case [SEC]
SEC Charges Hedge Fund Firm Sigma Capital with Insider Trading [SEC]
SAC Settles Insider Trading Cases for $614 Million [DealBook]
Earlier: SAC Capital Thrilled To Be Paying Largest Fine Ever For Insider Trading

1.Gotta say I'm a little unimpressed by the counting on Elan, which tracks only losses avoided by flipping from a long to a flat or possibly short position on Elan and Wyeth at the last minute before the negative results were announced. Presumably Martoma, who was getting inside information from Gilman for months, made money on the way up too.


  • Say CR Intrinsic Investors made $276mm on Elan.
  • 50% of that went to fees.
  • 60% of what was left (30% of the total) went to Steve Cohen and employees.
  • 20% went to investors.
  • So really 80% of it - $221mm - went to SAC, and only $55mm to investors.
  • Now they gotta pay back $552mm.
  • 100% of which comes from SAC the firm, not investors.
  • So they end up paying $552mm on $221mm of profit, or about 2.5x.
  • Plus interest!

3.Meaning Steve obvs.


SAC Granted Permission To Put One Allegation Of Insider Trading Behind It

A judge ruled today that SAC can proceed with a $14 million settlement with the SEC, while Steve Cohen will have to wait a bit longer to find out if he's allowed to put up over half a billion to settle another one.